Long Range 1 tanker rates are soaring in Europe as vessels are delayed due to high storage levels in Europe, and the busy naphtha arbitrage to the East is rapidly eating into the available tonnage.
LR1 rates on the Northwest Europe to West Africa route, basis 60,000 mt, rose by 45 cents to a five-week high of $17.49/mt Tuesday and was steady at same level on Wednesday, after enjoying a few weeks of bullish market sentiment because of tightening tonnage supply.
On Thursday, freight rates on the route were pegged within a range of $17.49/mt to $17.93/mt, equivalent to Worldscale 97.50-100.
Upward pressure on rates was building as ships, coming from the East with jet and ultra-low sulfur diesel had to sit idle with cargoes on board while charterers struggled to find a home for their products due to a lack of storage space and scant demand for middle distillates in Europe.
"A number of LR owners have been waiting in Gibraltar and Cape of Good Hope with jet and diesel from Asia for the last two to three weeks," a shipbroker said.
THE PRICE OF WAITING
While traders are waiting for a change to market conditions to sell already seaborne cargoes, charterers have to exercise the storage options on the fixed vessels, keep them on demurrage or re-route them via the Cape of Good Hope instead of the Suez Canal. In all cases it may cost them quite a bit extra in freight expenses.
For example, the daily demurrage rates charterers have to pay for ships they keep waiting may differ depending on when the tanker was fixed, but are generally $23,000-$24,000 for LR2 tankers and $21,000-22,000 for LR1s, sources said. If a vessel gets re-routed via the Cape of Good Hope and has to wait there, the bill for extra steaming days and demurrage may be substantial.
"Still, charterers, who have a low enough demurrage rate on their ships, may be paying less than those who hired tankers on time-charter for storage," a shipbroker said.
Charterers that hired LR1 tankers for a short 45-90-day time-charter to use them as floating storage may be paying as much as $25,000-$30,000/d, sources said. They also have to take care of bunker and ports costs during the employment period, though the figure could be lower for vessels th at lack approvals, like those coming out of dry-dock.
While a number of LR tankers are hanging in this expensive limbo, others are leaking out of the Atlantic tonnage pool through the busy naphtha arb to the East. This was because no LR1 or LR2 tankers were available in Northwest Europe until November 8, giving shipowners increasingly more clout to push for higher freight rates while this trend continued.
EUROPE TO ASIA NAPHTHA ARB SUPPORTS LR TANKER RATES
There has been increased naphtha arbitrage activity from Europe to Asia recently as underlying demand across Europe remained thin. Europe typically exports naphtha to Asia and monthly flows range from 1 million to 1.5 million/mt. More naphtha demand in Asia and limited demand outlets in Europe have encouraged robust arbitrage flows recently. Activity on the Mediterranean-Japan route for cargoes has increased in particular.
Naphtha is typically exported on LR2 and LR1 tankers to Asia on a Mediterranean-Japan voyage.
Freight rates on the Mediterranean-Japan route rose $1.82/mt to $38.18/mt on Monday, the highest assessment since August 25, when the rate on the route was at $41.82/mt. Freight rates were steady at the same level Wednesday, but sources said they have potential to strengthen on Thursday due to a tight position list of LR1 and LR2 tankers in Europe.
The arbitrage to Asia was seen as open from the Mediterranean Wednesday, while it was described as more difficult to work from Northwest Europe due to a narrowing East/West spread. The December East/West spread -- the premium of CFR Japan naphtha cargo swaps over the CIF NWE naphtha cargo swap -- contracted to $28/mt Wednesday at market close, down from $30/mt Tuesday.
While the naphtha East/West spread narrowed, arbitrage flows received support from healthy demand from olefin producers in Asia. High steam cracker run rates in Asia, supported by substantial ethylene cracking margins, prevented sentiment from weakening amid expectations of higher arbitrage flows from West of Suez for November and December.
"People are bullish that Asia can take that much," a source said Friday. Previously, upward pressure on LR1 and LR2 rates in Europe and declining cash premiums in Asia had made the arb to Asia more difficult to work.
These ample arbitrage flows come amid thin demand in Europe. "I think people are sending [naphtha] to Asia because it is the only place that can absorb the product," a source said.
